01-01-1970 12:00 AM | Source: Motilal Oswal Financial Services Ltd
Be Bold, Buy Gold this Diwali for 15% upside
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Time to accumulate gold this Diwali!!!

2022 has been a highly volatile year for Gold and silver prices. On domestic front both metals on YTD basis, have given returns of 5% and -9% respectively. Geopolitics, Central banks action and Inflationary concerns are themes that are not only driving precious metals, but also triggering volatility in other asset classes.

On one end, the Fed is rushing to raise interest rate at an aggressive pace with an objective to tame inflation. On other hand, geo-political tensions between Russia- Ukraine and other economies continue to increase distress in economy. All this is raising questions regarding pace of global growth, institutions like IMF have also lowered their projections on the same.

India is one of the largest consumer of gold and silver, as it is not only used as a source of insurance, but also an investment in form of jewellery, coin and bars. There has been a lot of development especially on domestic front which are supporting prices. Government initiatives like, setting up GIFT city, signing an FTA between UAE and India, (implies that ~ 200 tonnes of gold will be imported from UAE at 1% TRQ) and changes in import duty.

We believe that this year macro factors will have an upper hand over the move in metal prices, as tighter monetary policy scenario is not a great phase for non-yielding asset i.e. gold. To justify this analysis, we have compared Diwali month returns over past 10 years. 2013 was the year when taper tantrum was announced, 2015 -2018 was rate hike cycle, 2019-2021 was lower interest rate zone and 2022 we are again in the rate hike scenario. During rate hike scenario, Diwali months return for gold has been negative.

It also gets important to watch the price trend for gold that is currently stuck between tussle of bulls and bears. Extreme negatives does trigger bargain buying for gold and so it is important for medium to long term investor to see a broader picture. Except for a few dips, overall trend for gold has remained positive, and the returns also are quite decent.

Speculative Net long position for gold at the start of 2022 were at ~117,700 contracts and currently stand at ~1300 contracts. ETF flows as well is not showing that great of a confidence, as Gold SPDR holdings were at ~1020 tonne at the start of this year and currently is marked at ~945 tonnes. Also, when we talk about demand, it becomes very important to discuss central banks gold buying spree. Slowly and steadily many central bankers are increasing their gold reserves in order to safe guard their economy against uncertainties.


On domestic front, gold and silver prices gets a boost during festive season. Fall in precious metal was restricted following rupee depreciation that was to the tune of ~10% coupled wiith hike in basic customs duty on gold imports by 5%. As India is a price taker any movement in COMEX affects our prices. Macro economic backdrop does have an upper hand this year, major focus is on central bank’s monetary policy, inflationary pressure, and geo-political tensions. If there are any changes in these factors, we could see some short covering, which could take gold prices much higher and quicker, but we feel that till the time we don’t see a change in stance from major central bankers w.r.t aggressive interest rate hikes, we could continue to witness pressure on gold prices. Amidst these uncertainties, it is advisable to have gold and silver in one’s portfolio. Hence, anyone who is looking to invest in gold and silver with a medium to long-term outlook can start to accumulate at these levels. 


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